Are ‘sin stocks’ good for one’s portfolio? A new ETF is wagering big on vice

Depending on one’s tastes, a new exchange-traded fund could be one of the most fun investments of all time.

The AdvisorShares Vice ETF is dedicated to the so-called “sin stocks” of the market, or companies that deal in products seen as vices. The fund is scheduled to launch on Tuesday under the ticker symbol “ACT,” the letters of which stand for alcohol, cannabis, and tobacco, the three main focuses of the actively managed ETF.

“We’re not making any kind of moral judgment or statement about what people want to consume with this focus; there’s a strong economic argument for looking at these sectors,” said Dan Ahrens, a managing director AdvisorShares who is serving as the fund’s portfolio manager.

“These are all steady, predictable industries, and they’re at least recession resistant, if not recession proof, because people smoke and drink no matter what is going on in the economy. Tobacco is one of the most profitable consumer products in the industry, and there’s tremendous upside potential in companies with cannabis exposure, as that is an industry that’s in its infancy.”

Beyond their being seen as “vices,” there is financial overlap across the industries. Tobacco companies would likely be heavily involved in the event recreational marijuana becomes legal in a broader way than it has of yet, and even alcohol companies have making inroads into the industry. In October, Constellation Brands—the distributor of Corona beer—bought a stake in a marijuana business with the aim of developing drinkable marijuana products.

“The large alcohol and tobacco companies have a great deal of knowledge and expertise in working with and navigating the space of highly regulated and taxed products. It’s very possible that we could see merger and acquisition activity in these spaces, or joint venture activity,” Ahrens said.

The fund will charge a net expense ratio of 0.75%, which is slightly lower than the average expense ratio for actively managed ETFs. According to 2016 data from Morningstar, the average actively managed U.S. stock ETF charged an expense ratio of 0.864%.

The alcohol, cannabis, and tobacco sectors have all been seeing strong growth of late, and the expansion isn’t expected to end soon.

The tobacco industry overall, according to data from Morgan Stanley Investment Management, has seen compounded earnings growth of 7% a year over the past decade, with a yield of 4%, compared with the earnings growth of 0.5% posted by the MSCI World Index, which also has a lower yield.

Morgan Stanley Investment Management added that pricing power, along with the opportunity represented by next-generation products like e-cigarettes, could support the group going forward, helping it extend a lengthy period of strong earnings growth.

The alcohol industry has also been enjoying a period of expansion. Volumes for spirits grew 2.4% last year, according to data provided by the Distilled Spirits Council, while supplier revenue was up 4.5% to $25.2 billion. An ETF dedicated to whiskey companies, the Spirited Funds/ETFMG Whiskey & Spirits ETF
US:WSKY
is up 35.6% thus far this year, above the 18.6% rise of the S&P 500
SPX, -1.66%

The cannabis and legal marijuana industries have also seen blistering growth of late, and that is expected to continue and even accelerate as more states allow expanded uses. By one estimate, the marijuana industry could see $50 billion in annual revenue by 2026—though some of that will come from the still-robust black market. Marijuana sales rose 30% in 2016, according to Arcview Market Research, and they are seen tripling in four years.

A similar strategy is already available in mutual fund form: the USA Mutuals Vice Fund
VICEX, -1.57%
which has outperformed the S&P 500 over the past 15 years. Ahrens was the original portfolio manager of the fund, and while he said the fund demonstrated the viability of this strategy, he couldn’t comment on its recent performance as he no longer managed it.

The fund is up about 22% thus far this year, compared with the 18.6% rise of the S&P 500. The below chart compares the two over a 15-year period (the fund is in red while the S&P is in grey).

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